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Buffett Warns of Liquidity Curse

In his annual letter to shareholders, Warren Buffett promotes his buy-and-hold approach to investments for professionals, calling stock market liquidity a curse for many equity holders.

Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., cited a farm he’s owned since 1986 to caution individuals against frequent buying and selling of stocks.

Investors should treat their equity holdings like real estate purchases, focusing on the potential for profits over time rather than short-term price fluctuations, Buffett, 83, wrote in an excerpt from his annual letter published on the website of Fortune magazine today.

“Those people who can sit quietly for decades when they own a farm or apartment house too often become frenetic when they are exposed to a stream of stock quotations,” Buffett said. “For these investors, liquidity is transformed from the unqualified benefit it should be to a curse.”

Buffett has pursued a buy-and-hold investment approach as he built Omaha, Nebraska-based Berkshire into a $280 billion company accumulating the largest holdings of Coca-Cola Co., American Express Co., and Wells Fargo & Co. He’s said individual investors may be better off avoiding his approach to picking stocks, instead purchasing a fund that holds every company in the Standard & Poor’s 500 Index.

“The goal of the nonprofessional should not be to pick winners,” Buffett wrote. “The ‘know-nothing’ investor who both diversifies and keeps his costs minimal is virtually certain to get satisfactory results.”

The S&P 500 has returned about 7 percent annually over the past decade, beating by almost a percentage point the average yearly advance of Buffett’s company. Buffett has said he aims to increase Berkshire’s book value, a measure of assets minus liabilities, more rapidly than the S&P 500.

Buffett’s track record of profitable stock picks and takeovers has helped make his letters a must-read on Wall Street. The billionaire has said he writes them to be understood by his sisters, who don’t work in finance. The full document will probably be released by March 1, along with financial results for 2013.

In today’s excerpt, Buffett cited the agricultural holding and a 1993 investment in New York City real estate. Annual distributions on the retail property, near New York University, now exceed 35 percent of the initial investment.

‘Moody Fellow’

He purchased the 400-acre (1.6 square kilometer) farm, located 50 miles (80 kilometers) north of Omaha, for $280,000 in 1986. He says he calculated the farm’s return to be about 10 percent, based on production estimates for soy and corn. The farm is worth about five times what Buffett paid, and earnings have tripled, he wrote.

The billionaire compared the daily fluctuations in stock values to an erratic neighbor standing near his property, yelling out offers for the land.

“If a moody fellow with a farm bordering my property yelled out a price every day to me at which he would either buy my farm or sell me his—and those prices varied widely over short periods of time depending on his mental state—how in the world could I be other than benefited from his erratic behavior,” Buffett wrote. “If his daily shout-out was ridiculously low, and I had some spare cash, I would buy his farm. If the number he yelled was absurdly high, I could either sell to him or just go on farming.”

That’s not how equity holders often react, Buffett said.

“Owners of stocks, however, too often let the capricious and irrational behavior of their fellow owners cause them to behave irrationally,” he wrote. “Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits—and, worse yet, important to consider acting upon their comments.”

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